March 25, 2015 | Business Insider

The Sanctions on Iran Are Already Falling Apart

The Obama administration insists that the November 2013 interim nuclear deal with Iran gave Tehran’s economy only limited sanctions relief and that it can respond to Iranian misbehavior by snapping back sanctions at any time in.

Iran’s economic windfall, however, goes well beyond the monthly cash transfers and temporary easing on trade stipulated in the Joint Plan of Action, or JPOA.

Not only has the JPOA halted Iran’s slide into economic disaster, but the benefits the deal has prompted are a fraction of the dividends the Islamic Republic is set to reap the day a final agreement is reached.

These gains are only partly due to sanctions relief: Iran’s improved position also results from lax sanctions implementation by its neighbors, reluctance by European authorities to discourage their own economies from trading with the Islamic Republic, and Tehran’s fine-tuning of its talent for bypassing sanctions.

As a result, the interim nuclear deal looks increasingly like a slow-motion funeral procession for the sanctions regime.

Overwhelming evidence suggests Iran has successfully overcome banking sanctions to manage overseas payments. For example, email correspondence between a European manufacturer and an Iranian banking official, leaked last year to the Foundation for Defense of Democracies, helpfully details how to bypass banking sanctions.

Seven Iranian banks not under EU sanctions can be used to process payments, but in the email, the Iranian banking official admits that European correspondent banks, out of zealous overreach, might refuse incoming funds.

To overcome this problem, he offers three alternative methods of payments: avoiding reliance on Letters of Credit by paying directly into suppliers’ accounts in Europe; using Iranian subsidiaries in Turkey and Dubai for payment and delivery of goods; and using a European company’s subsidiary branch in friendly countries like China, India, South Korea, and potentially Russia to handle sales and payments.

Such payment mechanisms work because they obfuscate the final destination of goods — namely Iran — and rely on banking institutions and Iranian front companies overseas to act as intermediaries for payment and shipment between Iran and Europe.

A recent Reuters article revealed that Iran not only knows how to process overseas payments. It has also regained access to foreign currency.

Tehran was able to repatriate $1 billion in cash through Dubai by relying on local money-exchange houses and moving the cash in hand luggage carried by businessmen flying on commercial flights. Moreover, an Iranian MP has publicly accused Iran’s Central Bank of sending cash suitcases of UAE dirhams outside Iran to buy dollars.

Further evidence points to cash moving out of Iran to enable illicit procurement. According to a Georgia-based Iranian businessman who spoke to us on condition of anonymity, couriers from Iran routinely fly to Tbilisi with cash suitcases (both FlyVista, a low-cost Georgian carrier, and Iran’s ATA air have scheduled Tehran-Tbilisi flights). With no limits on declared financial instruments brought into Georgia, Iran is able to bring foreign currency back into its borders through Dubai and transfer it to Georgia to finance procurement and trade.

Iran is able to run rings around the sanctions regime because of lax implementation of EU and US sanctions in the Islamic Republic’s “near abroad.” From the Persian Gulf through Turkey and the South Caucasus, Iran can rely on its neighbors to allow bilateral trade with Tehran to flow unimpeded. Turkey, for example, is home to more than 3,000 Iranian companies, including US-sanctioned Bank Mellat.

Ankara has cited the JPOA as the basis for loosening restrictions on Iranian banking, and in any case, none of Iran’s neighbors has fully signed on to EU and US sanctions. The interim deal and a looming final agreement are vindicating their approach: having kept their doors half-open to Iran’s business, its neighbors will be the first to gain from the demise of the sanctions regime.

Direct trade is also getting a push from the new psychological environment that the interim deal has created. Few in Europe believe the sanctions will remain, and many are exploring future commercial opportunities. In the meanwhile, Europe’s bilateral trade with Iran is climbing back to pre-sanctions levels — further evidence that banking sanctions are no longer effective.

According to Iran’s Press TV, last month the French automaker Peugeot finalized a deal with Iran Khodro, the Islamic Republic’s largest car manufacturer, to launch a new joint venture. This is the latest in a long string of European trading overtures to Tehran, reflected in a steep increase in European exports there. The German-Iranian chamber of commerce has reported a 36%-increase in Germany’s exports to the country for 2014 and Iranian figures show an 18% uptick in exports across Europe.

The Obama administration may still believe it is able to snap sanctions back at any time if Iran cheats on its commitments under a final agreement. Developments thus far under the interim deal suggest otherwise.

Emanuele Ottolenghi is a Senior Fellow at the Foundation for Defense of Democracies. Find him on Twitter: @eottolenghi 

Saeed Ghasseminejad is an Associate Fellow at the Foundation for Defense of Democracies. Find him on Twitter: @SGhasseminejad 

 

Issues:

Iran Iran Sanctions